Everyone is talking about net-zero, and net-zero commitments are proliferating in the business community, especially since the COP26 summit. The summit threw a spotlight on corporate carbon footprints and the need to reduce them, with a rising tide of ESG-related expectations, requirements and regulations driving action. What does this mean in practice, though? Net-zero ambitions are great, but how do they translate into your organization’s strategy and operations? Do you have an action plan in place to achieve your net-zero ambitions? How do you plan to track progress, ensuring you can take the necessary steps to stay on track?
How Can Integrated Risk Management (IRM) Help with Net-Zero?Although there is a lot of buzz around net-zero commitments and much talk of timelines and objectives, many companies are still unclear about how they turn this into workable action plans. IRM is recognized as an approach that can help. Net-zero commitments should be an intrinsic element of your broader risk management strategy — and aligning net-zero activity with IRM will help you achieve results quickly and more efficiently. Linking climate objectives and net-zero commitments to IRM is a pretty new concept, but some organizations and bodies are already exploring it. The UK’s Pensions Regulator, for instance, announced in April 2021 its intention to publish guidance for pension schemes that “will specifically consider how to take account of the impact of climate change in Integrated Risk Management (IRM).” However, as recently as November 2021, delegates at a risk management conference reported that their net-zero and risk management strategies were “not very integrated.” If integrating net-zero and risk management strategies helps deliver climate promises sooner, what are the steps you should take? How can you integrate net-zero commitments with IRM?
Step 1: Defining Your Company’s Net Zero Vision and ObjectivesDevising a viable net-zero strategy means understanding how to align your commitments to your organization’s larger strategic objectives. When it comes to nature positive or carbon-neutral strategies, delivering on promises is vital, but many US companies are falling short of their commitments and attracting negative headlines as a result. It’s crucial to have a clear mission statement on net-zero and clear objectives to achieve it. Realistic and measurable targets are vital. Your organization needs to define its vision around net-zero commitments, articulate this and connect it to your wider corporate strategy and risk management approach.
Step 2: Developing a RoadmapA poll at the RIMS conference in November 2021 asked about the focus of delegates’ net-zero strategies. The most popular action was to focus on moving to renewable power (26%), followed by greening supply chains (19%), adopting new technologies (18%), altering products and services (15%), and purchasing carbon offsets (9%). Whatever your key goals, you need a clear roadmap to achieve them. IRM plays perfectly to this, a clear set of practices and processes designed to improve organizational decision-making and strategy via a holistic approach to risk. In developing a net-zero roadmap, you need to:
- Consider roles, responsibilities and organizational structures. Your board will have a core role in setting your organization’s direction on all things environmental, social and governance (ESG), but those at all levels also play a crucial part.
- Align your organizational strategy and business models to net-zero; how do your broader strategies and policies support your environmental commitments?
- Devise a clear roadmap or action plan connecting your net-zero aims to your more comprehensive risk management strategy.
Step 3: Identifying Key Performance IndicatorsWhat gets measured gets managed; measuring progress against your environmental goals is no exception. Whether it’s calculating your greenhouse gas emissions or other aspects of your environmental performance, defining core metrics to measure your ESG risks and progress is essential. As your ESG strategy moves from conception to maturity and you take tangible steps to achieve your net-zero commitments, you need a proactive approach to setting KPIs and putting in place strategies to achieve them. In some cases, these measures are externally-mandated, as with financial reporting requirements like TCFD. In others, they will be determined internally, totally with your priorities. Setting quantifiable KPIs is a core step in an IRM program. To align with net-zero aims, determine how these KPIs will capture climate-related risks. Devise a framework to track, measure and report on the indicators you set.
Step 4: Defining Data Collection and Governance ModelsOnce you’ve set your KPIs, you need a plan for gathering data and robust governance around monitoring and exceptions. Using the “best available information” is one of the recognized principles of risk management — but the information is not at its best if you rely on siloed data sources. IRM leverages technology to break down these siloes, both in data gathering and governance of that data. This is vital if you are measuring environmental controls as part of your net-zero commitment; metrics covering your ESG performance may span a range of departments, operations and locations. Once data has been collected, a similarly integrated set of governance processes should be in place to ensure the necessary controls over data gathered and any “out of tolerance” readings.
Step 5: Integrating ESG Criteria Into Broader Risk Management Systems and ProcessesReaching net-zero commitments and other ESG goals are made harder — and in fact, maybe unachievable — if they are not set in the context of a wider framework. A structure that, like IRM, creates consistency and rigor around risk management protocols and measures. Aligning your net-zero activity with your IRM strategy:
- Ensures you can integrate ESG actions into day-to-day operations.
- Enables new and evolving ESG reporting requirements to be swiftly adopted into your approach and measurement.
- Helps you to understand the ESG-related risks you face and implement a proportionate ESG strategy. As the European Banking Association notes, organizations “with material exposures to ESG risks should have more sophisticated governance and risk management arrangements” — bear this in mind when devising your approach.